CONTRIBUTION MARGIN CM

Contribution Margin or CM is used to analyse, how much contribution is earned, when variable costs are deducted from sales revenue of an entity.

Contribution margin is used in decision making scenarios.

Contribution margin can be calculated per unit or in revenue terms.

It is calculated as follows:

Per Unit: 
CM Per Unit = Sales Price (Per Unit) - Variable Costs (Per Unit)

Revenue Terms:
CM = Sales - Direct Materials - Direct Labor - Variable Overheads

Presentation of Contribution Margin is as follows:

Sales                                         xx

Less: Variable costs

- Direct materials                     (xx)
- Direct labor                           (xx)
- Variable overheads                (xx)
                                                   
- Total variable costs                (xx)  
Contribution margin                  xx

CM Ratio:
Contribution margin ratio is calculated as follws:

CM Ratio(%age)  = CM / Sales * 100

Example 1:
Sales Price = 100 per unit
Direct Material = 20 per unit
Direct Labor = 30 per unit
Variable Overheads = 20 per unit
Number of units produced and sold are 500 

Calculate: 
1) Contribution Margin per unit and in revenue terms?
2) CM ratio

Solution:
1) Per Unit
CM - Sales - Direct Materials - Direct Labor - Variable Overheads
CM = 100 - 20 - 30 - 20 
CM = 30 per unit

Revenue Terms:
Units Sold * CM per unit
500 * 30 = 15,000

2) CM Ratio

CM Ratio = CM / Sales * 100
CM Ratio = 30 / 100 *100 = 30% 


Example 2:
CM Ratio = 20%
Sales Units = 100
Selling Price per unit = 10 per unit
Variable Costs = ?
Calculate Contribution Margin in Revenue terms and Variable Costs?

Solution:
Contribution Margin CM = CM Ratio * (Units Sold * SP per Unit)
CM = 20% * (100 * 10)
CM = 200

Variable Costs = Sales - Contribution margin
Variable Costs = (100 * 10) - 200
Variable Costs = 1000 - 200 = 800